Tabs

Saturday, 1 August 2015

Gold has been a
valuable and highly sought-after precious
metal for coins, jewellery,
and other arts since long before the beginning of recorded history.
Running into 2015 for past couple of decades gold process have been showing a
consistent positive trend making it a safe bet to invest. Up until the end of
2013 and early 2014 gold was looked upon as the most sought after asset class
as a form of Investment. Then, gold had touched almost INR 32,000 per 10 grams,
rumours were spreading that gold in near future will touch the level of INR
50,000 per 10gms of gold. Many fund houses
even started with an IPO based on this a new found class: GOLD, on the
expectations that gold will rise and give steady but decent returns.

Soon after, gold
prices started to fall. To one’s dismay,
gold has now touched an all-time low in past 4yrs of INR 24,000 per 10gms. This extreme fluctuation has now raised many
questions. What led to sudden fall in gold prices? Is gold indeed an Investment to be trusted
upon? Will gold prices rises in
future? According to a school of thought
which says this might be created by China to help them store huge quantity of
gold, is that true?

To answer the
above question we need to understand why the gold prices rose in the first place. It is observed that gold rates are inversely
proportionate to the overall financial stability of the world but majorly to
American economy. The price of the metal
is also determined by its own demand and supply. Towards the end of 2008, the American economy
was hit by the sub-prime crises and the so called Housing bubble, leading to
recession in American economy, thus increasing the investor’s faith in this
yellow metal. Also the economic problems
in euro zones and with countries like Spain and Greece led to more panic across
the countries in world for future wave of depression. Thus, many countries including China started
to buy and hoard the yellow metal, thus increasing the demand of gold vs the
expected shortage of gold.

As gold being a
metal that needed to be unearthed and gold extractions from the mines were
getting deeper, riskier, rarer and hence more expensive. All these factors led to sudden and steep
rise in price of this precious Yellow metal called as “Gold”.

Then, what changed
the fate of rising gold prices? Exact
reversal of all the above factors. The
most immediate factor for the drop in prices is strengthening of dollar. Gold
is priced in dollars so if the dollar goes up investors marks down the yellow
metal. Dollar is rising because the
American economy is on its revival mode and stabilizing from the recession it
earlier hit. The interest rates in
America were increased. The higher
interest rates increase the opportunity cost of holding the zero yield assets,
thus the money that is otherwise tied up in the bullion investments will earn
more return if invested in a treasury bill or other debt.

The good
political news in euro zone also had an impact on gold rates. The reduced chances of messy default by
Greece and hence the break-up of the single currency increased the confidence
in Euro leading to the fall in demand for gold.
Another expectation amongst gold fans was that the Chinese govt. who
wanted to make yuan a reserve currency would stock up and hoard hefty levels of
gold and make its currency creditable, but to surprise China did stock up gold
but only little.

So is it all
right to say that gold is not a safe asset as a form of investment? Well that’s for you all to decide. Investment in any asset should never be
lopsided just because it’s showing great returns in a given time period. Also, investments should be done keeping a
longer time horizon in mind.

Saturday, 18 July 2015

World in recent times has been going through economic turmoil. Be it Eurozone or China crisis. In a connected world with ever increasing globalization, impact of any such undesired situation is far reaching.

Since the time the Shenzen & Shanghai Stock Exchanges have crashed heavily in end of June and early July leading to many citizens of China losing huge amount of Investments close to $3 trillion worth market value. Apart from small investors, included were the housewives, students & employees who had quit their jobs with a dream to earn quick bucks in these upwardly rising stock market. The government tried to manage this situation by a rate cut but that didn’t help to correct the situation.

Now the real question is, "How did China an economy which was having a promising GDP landed in this bubble situation?" Put in simple words the asnwer is, Chinese economy was giving all the indications of a so called “the bubble situation which was ignored by industry & government, either knowingly or unknowingly.

It all started with successful capitalist reforms led by Deng Xiaoping for privatisation, opening up foreign investments, banking reforms, development of capital market etc. With reforms urbanization started heavily with people moving to bigger cities from villages for a better lifestyle.

With nearly three decades of unprecedented GDP of 9.5% led by economic liberalization, modernisation and infrastructural development china started to show the sign of speculation and over-exuberance in the year 2008 like a brief stock bubble and housing bubble. In the global financial crises of 2008 China suddenly changed its focus to potential domestic crises and the threat to its social stability. With this view in mind China decided to launch a huge economic stimulus program, though it helped temporarily but this newly printed money raised concerns leading to speculative activities, inflation, devaluation of existing currency, taxes on wage earner to fund the stimulus, undertaking highly ambitious but wasteful projects which otherwise wouldn’t have been undertaken.

Further adding fuel to this bubble is the Credit bubble. The 2008 stimulus program lead to humongous development of Infrastructure most of which is not in use even till date. 100 and more infrastructure projects are currently undertaken, road are built, dug and rebuilt, extravagant government buildings are being built in outer china, “ghost cities “ are built, the rush of completing these projects are leading to bad workmanship and hence bridges or building being closed for safety reasons.

The warning of this credit bubble was already given by Moody and Fitch showing how the local government was funding these extravagant and overly ambitious projects which will lead to bad debts, it is projected that almost $540 billion out of $1.7 trillion might turn out to be bad debt. No doubt economic bubble and reckless credit boom go hand in hand.

The credit boom and economic bubble lead to high inflation and increasing food prices, rent and wages and negative interest rates. With this fear in mind many people felt that the only way to save their money is to invest in realty. This sudden realty demand led to rise in housing prices close 140% between the years 2007-2011. These speculations lead the housing prices as high as 27:1 price : income ratio, very much in the line of US and Japanese housing bubble. Local government easily encouraged such speculations case they were to receive land sales taxes which will help them pay off their increasing debts.

China will have to soon take some corrective actions against this “Crises in making” as it has already lost its edge as a cheap labour market where other countries like Philippines and Indonesia are competing with china for the same.

The elite class is speculating for uprising and revolution which is making wealthiest Chinese citizen to immigrate out of china. The credit crises is leading to many loan defaulters, people closing businesses altogether and running underground.

What's in it for India to Learn?

India like China is also witnessing a slump in realty market over past one year or so. In spite of huge response to Make in India as an initiative, markets & inflation are inconsistent. Government should monitor the situation closely in order to keep any such situation at bay.

Is any particular crisis bigger than another? Is Greece crisis bigger than China crisis? In my opinion, if we are thinking on this question then we are missing on important & vital question, big or small, can the world economy afford such crisis & its lasting impact? The country directly involved is directly affected, but does this stop there? Anyone who is linked to the struggling economy, is taking the portion of this burden with themselves, be it an individual or a nation.

Friday, 10 July 2015

For India, a
country which is currently aiming to be the global hub for manufacturing,
competing with China, atomic power plant like the one proposed in Jaitapur is
the need of the hour. However, political parties are trying to use it to gain
political mileage & taking stands to oppose each other. Locals are opposing
the project strongly. Most common question raised by the locals is, “Why Jaitapur?
& more importantly why a nuclear power plant when there are alternate
sources of energy in abundance”. No one is considering the other side of the
story. In current turbulent times of world economy, there is no alternative to
industrialization if we are to become a sustainable economy. Power plant would
lead to the development & growth in the region & thus there is no
alternative to projects like Jaitapur Power plant.

Constructing the
large scale power plants & running them efficiently will require huge
commitment from the government. However, we currently do not have such large
funds available with us. At the same time multinationals from Russia, France,
US have shown tremendous interest in building large power plants in India. If
we keep these multinationals at the bay we may be missing out on 3 – 5 Lacs
crore worth of investments in India, which our country currently cannot afford.

Other aspect of
Atomic energy, national security is also equally important. India is surrounded
by nations with atomic warheads & relationships in spite of repeated
efforts haven’t really been in best of the shapes. In such a critical case,
unless atomic warheads are destroyed on global scale retaining capability for
national security & defense is essentially inevitable. In the absence of a
strong nuclear energy program research & development for nuclear warheads is
not possible.

Why is there a
strong resistance to nuclear energy? Following are major perceived threats on
global platform

1. Potential global
destruction that atomic warheads can cause.

2. Radiations
that can cause various complications & threat is possesses to living
beings.

3. Environmental
issues.

Advanced research
has been going on for considerable amount of time for effects of Radiations
& how best to keep radiation levels to acceptable levels. International Commission on Radiation
Protection (ICRP) has been working on research with support from across the
world.

Striking the
right balance between environment & developments is extremely delicate
task.

In case of Jaitapur, though
the number of people standing against the project is small, it is not
negligible. Everyone has been talking about the radiation & ill effects
that it brings to the environment the real concern for common man is different.
For politicians, it is an opportunity to take on their opponents & to
showcase their might, people who are not even qualified to talk about petty
issues are discussing atomic energy & trying to link its impact on
livelihoods of the locals.

For locals who may have to
relocate are worried about their social standing. For businessman community,
the challenge is different. For them development would mean increased wages to
workers. For farmers, they are worried about effect of radiation on the crops,
which traditionally have been the source of earning for majority of population
in the region. Fishermen are worried about the waste being disposed at the sea
leading to changes/ relocation of marine species to deeper seas. While these
concerns are perfectly valid for the common man, there is no basis for assuming
all of this will happen with a power plant starting. Norms for erecting &
commissioning of such large establishments are stringent & non-compliance
has severe penalty associated with it.

Power plant would require
the locals to relocate from the area, which is the biggest concern that the
locals currently have. Accepting such a change is not easy. Only expectations that
the locals currently have is to get the right price for the land which would be
forfeited & relocation into a well-planned & developed premise. Other valid
concern is relating to employment opportunities in relocated area. There is
nothing wrong with this expectation & there is no reason why government
cannot meet this expectation. The only challenge that remains here is, the
right price for selling land is perceived value. Each individual would have
different expectations on this part & arriving at a consensus could take
considerable time.

If these concerns are
addressed by giving a rational explanation, there is no reason why people would
oppose such developmental projects. NPCIL & government very recently
realized the importance of engaging with locals to make them understand the
project in layman terms addressing their concerns.

DAE New
Chairman- R.K. Sinha said, “NPCIL's would ensure neighborhood development
program before this plants starts commercial operation and neighborhood
development scheme implemented as part of the Corporate Social Responsibility, Economic
Development and transformation of the quality of the life of the neighboring
population.”

If government
works in a true sense to understand the concerns of the locals & address
them there is no reason why Jaitapur cannot be commissioned. Having said this, ability
to respond quickly & efficiently in case of any emergency post the power
plant is commissioned is altogether a different topic & needs to be
evaluated in detail considering the challenges faced during recent times in
Japan when power plant had reached a critical level & shutting down the
plant was a challenge.